Jefferies Equity Research analysts Sundeep Bajikar and Mark Lipacis take a close look at how the upcoming Galaxy S5 will shake up the marketpalce.
In addition to ramping Galaxy S5 shipments sharply in Q2, we think there is a good chance that Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) launches a higher-end Galaxy S5 in late-Q2. Our checks suggest that together with its Common Platform Alliance partners, Samsung is on track to disrupt Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)’s leading-edge foundry model this year. We think a combination of solid mobile and memory OP, foundry success, and cash return is likely to help the stock outperform.
Galaxy S5: Higher Smartphone Competition
We expect initial Galaxy S5 shipments of ~2m units in March, to be followed by a sharp ramp to ~15-16m units in Q2. We believe Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is trying to better align Galaxy S5 sell-in with sell-through. Our checks suggest there is a good chance that Samsung introduces a higher-end version of the Galaxy S5 (upgraded AP, 3GB DRAM, 32GB NAND) toward the end of Q2. Together with the Galaxy Note 4, which would launch in Q3, we think Samsung would be well positioned to compete aggressively with the iPhone 6. As previously noted by co-branded research partner Mirae analyst Hyunwoo Doh, we believe Samsung’s Q1 Smartphone shipments are tracking up QoQ.
TSMC Disruption
Our checks suggest Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is on track to begin volume production at its 14nm FinFET node in 2H14, we estimate ~1-year ahead of incumbent foundry leader TSMC’s 16FF Plus. Through active enabling of Common Platform Alliance partners (e.g. IBM, Globalfoundries), we expect Samsung’s 14nm to pose a larger disruptive threat to Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) than Samsung competing on a standalone basis would be. Contrary to investor concerns, we see no reason for Samsung to convert any of its S.LSI fabs in Austin or Giheung to memory. Separately, our conversations in Asia suggest TSMC might be struggling to manufacture the A8 processor for Apple’s iPhone/iPad.
Cash Return Potential
Our proprietary “Go North” framework suggests that returning more cash to shareholders could help Samsung stock outperform. We believe Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is not only well positioned but also planning to return a greater portion of its FCF to shareholders in 2014.
